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percent of the tax required to be shown in the return for the
taxable year or $5,000. Sec. 6662(d)(1)(A). An understatement
is equal to the excess of the amount of tax required to be shown
in the tax return over the amount of tax shown in such return.
See sec. 6662(d)(2)(A). The amount of the understatement is to
be reduced by that portion of the understatement which is attrib-
utable to (1) “the tax treatment of any item by the taxpayer if
there is or was substantial authority for such treatment” (sub-
stantial authority), sec. 6662(d)(2)(B)(i), or (2) any item if
(a) “the relevant facts affecting the item’s tax treatment are
adequately disclosed in the return or in a statement attached to
the return” (adequate disclosure), sec. 6662(d)(2)(B)(ii)(I), and
(b) “there is a reasonable basis for the tax treatment of such
item by the taxpayer” (reasonable basis), sec.
6662(d)(2)(B)(ii)(II).
The accuracy-related penalty under section 6662(a) does not
apply to any portion of an underpayment if it is shown that there
was reasonable cause for, and that the taxpayer acted in good
faith with respect to, such portion. Sec. 6664(c)(1). The
determination of whether the taxpayer acted with reasonable cause
and in good faith depends on the pertinent facts and circum-
stances, including the taxpayer’s efforts to assess such tax-
payer’s proper tax liability, the knowledge and experience of the
taxpayer, and the reliance on the advice of a professional, such
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Last modified: May 25, 2011